Measuring the Impact of Price Changes on Poverty

International Poverty Centre UNDP Working Paper No. 33

18 Pages Posted: 28 Feb 2007

See all articles by Nanak Kakwani

Nanak Kakwani

International Poverty Centre

Hyun H. Son

Asian Development Bank

Date Written: November 2006

Abstract

This paper develops a methodology to measure the impact of price changes on poverty measured by an entire class of additive separable poverty measures. This impact is captured by means of price elasticity of poverty. The total effect of changes in price on poverty is explained in terms of two components. The first component is the income effect of the change in price and the second is the distribution effect captured by the price changes. It is the distribution effect which determines whether the price changes benefit the poor proportionally more (or less) than the non-poor. This paper also derives a new price index for the poor (PIP). While this index can be computed for any poverty measures, our empirical analysis applied to Brazil is based on three poverty measures, the head-count ratio, the poverty gap ratio and the severity of poverty. The empirical results show that price changes in Brazil during the 1999-2006 period have occurred in a way that favors the non-poor proportionally more than the poor. Nevertheless, during the last 2-3 years the price changes have favored the poor relative to the non-poor.

Keywords: Inflation, Price elasticity, Money metric utility, Price index for the poor

JEL Classification: B41, D11, D12, E31, I32, O54

Suggested Citation

Kakwani, Nanak and Son, Hyun H., Measuring the Impact of Price Changes on Poverty (November 2006). International Poverty Centre UNDP Working Paper No. 33. Available at SSRN: https://ssrn.com/abstract=965874 or http://dx.doi.org/10.2139/ssrn.965874

Nanak Kakwani (Contact Author)

International Poverty Centre ( email )

SBS- Ed.BNDES, 10° andar
70.076-900- Brasilia-DF
Brazil
+ 55 61 2105 5000 (Phone)
+ 55 61 2105 5001 (Fax)

Hyun H. Son

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

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